Frac Ranching vs. Cattle Ranching: Exploring the Economic Motivations Behind Conflicts Over Produced Water Recycling Projects

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Executive Summary:

  • The issue matters because increased produced water recycling can help operators achieve significant structural cost-reductions—both for initial well completions and for lease operating expenses over the wells’ full operational lifetime.
  • Reductions in water procurement and disposal costs would be enduring and could help offset cost inflation in pressure pumping and services areas that most E&Ps have less control over. All else held equal, this would bolster the sector’s overall global competitiveness amidst commodity price uncertainty.
  • To put the ranch-level economic impacts of greater produced water recycling into perspective, consider the following: a ranch that fills two 500,000 barrel frac pits per month with fresh water and only collects a royalty of $0.25/bbl and disposes of a million bbl per month at $0.10/bbl in royalties could realistically generate $4.2 million per year in profit.
  • That is the same profit it would likely clear selling nearly 11 thousand feeder steers at the trailing average price for the past five years. Producing that many salable head per year in West Texas could require more than half a million acres—larger than any ranch in the area.
  • If the ranch became a “full-service” water seller that invested in its own wells and high-volume sales pit, it could boost annual profits to nearly $6.8 million. In contrast, the annual royalties from recycling one million barrels per month of produced water would likely range between $300 and $600 thousand.
  • This steep drop off in income potential is likely to provide strong incentives for many surface owners to either resist all produced water recycling on their surface or ask for such high recycling royalty rates as to obviate the operating cost improvements an E&P could otherwise realize from recycling.
  • Flows of economic rents and shareholder value worth many billions of dollars are at stake and re-direction of these flows would produce clear winners (E&Ps) and clear losers (water-selling landowners). The Texas Permian Basin will likely be “Ground Zero.”
  • Some areas will have sufficient volumes of produced water that even if all frac fluid supply eventually comes from recycled water, there will still be a substantial market for disposal services in the area.
  • As the process unfolds, expect a substantial rise in legal disputes between landowners and operators over oilfield water recycling. Litigation will likely constitute an essential—if somewhat unpleasant—intermediate step as the law catches up with oilfield technology and best practices and provides greater clarity to guide future contractual decisions.

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